How a company can carry on successfully exploiting new technology and new markets once its original guiding force has retired?

Warner Bros Studios in Burbank : This past summer my son Gage and I had the pleasure of taking a tour of the Warner Bros Studios in Burbank. Unlike the glitzy Universal Studios Tours, at Warner they put you in an electric golf cart and drive you around the studios like a star, not a tourist. The tour was excellent and showcased much of what has made Warner so successful as both a movie studio and a television production company. We were told of Jack Warner‘s famous words that “if it can’t be used on screen, we are not spending one nickel on it.” One of the administrative buildings was constructed to look like a motel, others were built as a series of “houses” on a typical suburban street. They have appeared in countless movies and TV programs.

While frugal, Warner was not afraid to spend money on stars, or new technology. He blended pragmatism and business sense with a willingness to take risks when needed. The studio pioneered the move to “talkies” and later color. Television was viewed not as a threat, but an opportunity – with television production ultimately becoming as important as film to the studio.

But, as is too often the case, the Warner family did a poor job of planning for the future ownership and management of their business – in a hasty deal Jack Warner sold a majority of the company in 1966 to new owners who proceeded to first demote him from studio President to Vice President and then “flipped” their ownership of the studio a year later for twice what they paid for it. The subsequent owners wanted to run the business themselves and forced Jack Warner into retirement.

Mergers and Acquisitions: Since then Warner has almost continuously been involved in a series of spectacular, strange, and in several cases, disastrous mergers and acquisitions. It is a miracle that the core business of the studio continues to be successful while there has been so much craziness going on around it. It can be argued that the AOL acquisition of Time Warner in 2000 is the largest failure of a merger in business history.

Yet, it is important to note that Warner viewed the internet as an opportunity early on, as it did with sound, color, and television previously. Strategically, Warner was on the right track. But, its execution was a disaster. Warner never figured out how to leverage its ability to deliver content with the distribution channel and early lead AOL gave them on the internet. I won’t bother with another postmortem of this mind bending failure but rather point out that Warner had already seen this movie before.

In 1976 Warner was interested in expanding into new markets and acquired Atari. The fledgling business of video games had much in common with movie and television production and Warner recognized this before any of the other studios. Both were in the entertainment business and both were fueled by “hits” generated by creative and uniquely talented people. Warner’s infusion of cash helped Atari successfully move from video arcade systems into the home with the launch of its 2600 game console. Atari dominated both the home video game market and the arcade business in 1976 and 1977. But it wasn’t long before Warner management clashed with Atari founder Nolan Bushnell, ultimately firing him in 1978. Ironically, while Bushnell recognized the limited lifespan of both games and the hardware they were running on, Warner management chose to milk the existing offerings for all they would yield. While Atari did go on to release subsequent game consoles and even home computers, none ever achieved the success of the original 2600.

Meeting with Minoru Arakawa: By chance I had the opportunity two years ago to meet the fournder and former President of Nintendo of America who ran the company’s US operations from 1980 until 2002. I told him that I had closely followed Atari because one of my best friends had worked there and then. He opened up and told me about some of the history between Nintendo and Atari. Nintendo had been importing and selling the Magnavox home game system from the US and had also built and sold several single-game devices for home use when Atari launched the 2600 system. Nintendo recognized the power and elegance of the 2600 especially its ability to use plug in cartridges to play an unlimited number of games. Nintendo turned its attention to the arcade market and Nintendo America’s initial focus in the US was the development and sales of arcarde machines. With its arcade hit Donkey Kong in 1981, Nintendo discussed licensing the game to Atari for it to port to all of its home consoles and computers. But Atari management could not reach an agreement with Nintendo and the game was licensed to another console maker, Coleco. Coleco released a version for the Atari 2600, but would not publish a version for Atari’s newer and more powerful 5200.

Interestingly, the release of Donkey Kong in 1982 on the Atari 2600 was a big hit and likely extended the life of the seven year old console for another year or so.

In 1983 Nintendo released its first general purpose home game console in Japan. After a slow start in the Japanese market, Nintendo approached Atari about a strategic relationship. This time, Nintendo proposed that Atari would sell the Nintendo console in North America under the Atari name. Negotiations ensued, but agreement could not be reached. Atari management was distracted by an insider trading scandal and pressure from Warner over mounting losses. Nintendo decided to go it alone and ultimately launched their console in the US with great success in 1985, the same year Warner called it quits and sold its remaining interest in Atari to Japanese arcade company Namco after selling off the home console and computer business to Jack Tramiel a year earlier.

Once again, Warner recognized a strategic opportunity brought on by new technology, only to completely blow the chance of profiting from it over the long run. I still have the Atari 2600 that my parents bought for me in 1976 as well as the PacMan and Donkey Kong game cartridges that run on it. It continues to work and I have occasionally played the games on it with my son. But without a doubt Nintendo has captured far more of my video game money over the years than Warner ever did and continues to do so as we buy new games for our Wii.

Jack Warner was the visionary force behind the early success of Warner Brothers and it can be argued that the strongest part of today’s Time Warner is the very part of the company still operating according to his legacy – the movie and tv studio. The challenge is how a company can carry on successfully exploiting new technology and new markets once its original guiding force has retired. The leaders of Nintendo in Japan and the US both retired in 2002 but left the company in good hands as evidenced by the huge success of the Wii under the leadership of a new group of managers at Nintendo.

Mark Vernon

More about Mark Vernon: Palo Alto-born Mark Vernon is the President & Chief Operating Officer at Ridge Vineyards, one of the most remarkable vineyards in California – and maybe in the world. Did he have anything to do with technology? Yes. A Berkeley and MIT graduate in business, he was one of the most efficient VP of Sales and Marketing I ever had, because he loved and breathed technology (he was my VP of Sales and Marketing at ACIUS/4D before, becoming its President/CEO when I left the company. Then he became the CEO of a specialized graphics software company, IsoDraw which licensed technology to Adobe, before joining Ridge Vineyards in 1998.

1 response so far ↓

Thanks for the history lesson. Shows how short term performance can kill a successful concept. How about a comparison of Warner and Disney? Then, some good insight into California’s wine industry and its Nintendo counterparts?